Remarks
by
William E. Kennard
Chairman
Federal Communications Commission
to
Organization for the Promotion and Advancement of Small Telephone Companies
January 12, 1998
Fort Lauderdale, Florida
KEEPING AMERICA CONNECTED
(As prepared for delivery)
I. A Vision for the Future
Thank you Ed (Eichler) for that very kind introduction. I particularly appreciate that
introduction, because not long ago I left Washington to give a speech and my host said
simply, "And now . . . for the latest dope from Washington, here's Bill Kennard." So I do
appreciate your kind words.
I would also like to acknowledge Tom Power, my friend and colleague at the FCC.
Tom is an exceptionally talented lawyer who advises me on cable and common carrier issues.
I know you will enjoy working with him.
I am told that when FCC Chairman Al Sikes spoke to you several years ago, at the
end of his speech, he was presented with an oversized cowboy hat and required to shout
Yahoo! You may know that no FCC Chairman has spoken to you since. Well, here I am.
I am here because I want to share with you my vision for our country's future. And
I'd even wear a cowboy hat to do it, because this group is important to my vision for the
future. As you know, our country's future will be defined, in large part, by
telecommunications. More than any other industry, the telecommunications industry is
shaping our country's future in fundamental ways. It defines the way we that we
communicate in society; the way we come to know each other, as individuals and as a
collection of diverse races and cultures; the way we do business; the way we remain
competitive as a Nation; the way our children learn.
As you all know, we are at a pivotal moment in the history of telecommunications in
our country because we are transitioning from an era of monopoly regulation to competition.
This is truly a historic time. For the past one hundred years, the telephone industry was
considered a natural monopoly and regulated as such. The transition to competition is a
monumental shift, and not an easy one. But we all know that it is the right one.
We have seen the benefits of competition in some sectors of the communications
industry -- in wireless communications and long distance, for example. We have seen the
consumer benefits from lower prices, more choice and more innovation.
But as I have travelled around the country and talked to many Americans about
telecommunications, I've become more convinced than ever that competition is not the end in
itself. Competition is important only if it serves to build communities. Because, in the
final analysis, our goal is not just to deliver lower rates and more choices. Our goal is to
foster a telecommunications system that brings us together as a Nation. The goal must be a
telecommunications system that builds communities -- that keeps America connected.
The great federal highway projects of the post World War II era in this country were
significant not just because they permitted the flow of commerce and allowed Americans to
get more products faster and at cheaper prices. The huge investment that we made in those
highway systems brought our Nation together. It connected communities once isolated from
the mainstream of culture and commerce. It brought economic and social development to
many communities.
But let us not forget that some communities were left behind -- bypassed by the great
interstate highways. And, as a result, many of those communities suffered. In fact, some
communities bypassed by the interstate highway system could not survive and became ghost
towns -- left behind by the single most important factor in economic development of the
time.
Well, like those conventional highways, the Information Highway of today can bring
us together as a Nation, or divide us. It can connect small and rural communities to the
world of commerce and culture, or it can leave them behind. It is the most important factor
in the economic development of our time.
That is why you are so important to my vision for our telecommunications future.
Because you are the companies that will determine whether the Information Highway
connects all of America, or only some of America. So you are vitally important in my
vision of our country's telecommunications future.
Last month, I had the opportunity to visit Allen Layman's company, R & B
Communications, near Roanoke, Virginia, to learn more about what small telephone
companies do. Those of you who are familiar with R&B know that it is a very impressive
operation. Allen and John Rose of OPASTCO took me on a tour of R & B and showed me
how the company is offering customers access to advanced telecommunications services
through fiber optic technology and digital switching. I had the chance to visit with Allen's
parents, Vivian and Ira Layman, who told me about how they struggled for years against
very tough odds to build the company. The Layman family clearly shares my vision of the
importance of making sure that small town America is very much a part of America's
telecommunications future.
Companies like R & B are building the infrastructure that will keep rural America
connected. This means jobs and economic development can flow to those communities.
There is an increasing population shift from the cities to small towns and rural areas. So
instead of leaving rural areas to find economic opportunity in the cities -- the trend that has
characterized much of this century -- many Americans are now returning to small towns.
Telecommunications makes this possible. And those rural communities with the
infrastructure to allow people to do their jobs away from the big cities will fuel this
economic development in rural America.
Now let's talk about who is going to fill those jobs. We know that within two years,
60% of the jobs available will require information technology skills. High tech jobs pay on
average 73% more in wages than non-high tech jobs. And the three fastest growing
occupations in America -- which are also high-paying -- are computer related: computer
scientists, computer engineers, and systems analysts.
We must ensure that the children of rural Americans are prepared for the jobs of the
Information Age. We have a long way to go. There already is a troubling gap between
access to technology between rural and non-rural schools. Although 75 % of suburban
schools have Internet access at least to one place in the school, only 61% of rural schools
do. Sixty-seven percent of urban and suburban libraries offer Internet access, whereas only
49% of rural libraries do.
That is why the provisions of the Telecommunications Act of 1996 which include
schools and libraries in the universal service funding mechanisms are so vitally important for
rural America.
You have been playing and can continue to play an important role in your
communities by bringing educational technology to rural schools and libraries. When I was
in Roanoke, Allen Layman showed me a wonderful project that his company pioneered to
connect rural and suburban schools through distance learning. I saw students from rural
communities taking an advanced German language course using distance learning
technology. Technology made their class possible and is preparing them to compete for jobs
in a global, Information Age economy.
II. Meeting the Challenge to Keep America Connected
The great challenge that we face is to make sure that as we transition from monopoly
regulation to competition, the small companies have the resources and the incentives to
ensure that competition builds communities.
This is a challenge because in many cases, you receive much of your revenue from
one, or just a few, multi-line businesses. So while there is no immediate prospect of broad
based competitive entry in your areas, you are more vulnerable to cream skimming. One or
two large businesses may generate the majority of your interstate minutes of use. It be a
major farming concern in Iowa, a ski resort in Vermont, or an army base in Tennessee.
This is a challenge because many of you have costs that are higher than price cap
local exchange carriers. Because you often serve areas that are less densely populated, you
have longer loops and more expensive transport.
This is a challenge because many of you have higher network construction costs due
to difficult terrain. And because you serve smaller populations, you may not be able to
achieve the same economies of scale that larger carriers can achieve.
This is a challenge because on average, you serve between two and three thousand
customers. Some of you receive more than half of your total revenues from interstate
access and universal service, compared to just over 25 percent for the price cap carriers.
So because of these challenges, we must work hard to make sure that as the
regulatory environment changes in this great shift from monopoly to competition, it is
flexible enough to accommodate the special needs of your communities. Let me outline a
few of the regulatory challenges that we face.
Universal Service
First, universal service. At the outset, I believe universal service is about economic
development. It involves the fundamental policy of our country to reinvest in the
telecommunications network so that all Americans remain connected. It is every bit as
important as the investment that we made as a Nation in our interstate highway system.
Universal service is about economic development for every American, whether you
live in a big city or a small rural community. So it means that if you are a livestock broker
in Chicago you can grow your business by using the network to reach ranchers in Missoula,
Montana. And it also means that if you are a computer company in South Dakota, you can
grow your business by selling CD ROMS to customers in New York City, just like Gateway
2000 does every single day. This is about an investment in economic development. You
have a big stake in this debate, so it is important that you make sure that the debate is
framed in the right way.
Perhaps the biggest concern I ve heard about universal service support concerns the
forward-looking cost models. As you know, we are in the process of selecting a model to
reform universal service for the largest telephone companies. In the Commission's Universal
Service Order last year, the Commission said that it would not move the small companies to
forward-looking cost methods until the next millennium at the earliest.
Several of you have expressed concern that a change in the method of determining
universal service support from historic, book cost to a forward-looking method may be
harmful to small companies. I think we would all agree that eventually we will need a more
highly deaveraged means of delivering universal service support to small companies. But we
should not act prceiptiously, and we should have a much better understanding of how to
estimate costs on a deaveraged basis before doing so. The experience we gain from working
first with larger companies before considering small companies will be valuable. And any
new support mechanism for small companies will have to keep in mind the different
economic and demographic circumstances small companies face. Most important, we must
make sure that the new universal service mechanisms work. And we will need to work
together to make sure that they do work.
While I am committed to ensuring that there are no precipitous changes in the level
of universal service support for small companies, I think we would all agree that eventually
small companies will need a much more highly deaveraged universal support system than
exists today. It does not cost the same to provide service downtown as it does when you
move outside the town limits. Anyone who drives through any rural town in America can
see this. Ultimately, our regulations should move in the direction of reflecting that reality.
Average Schedules
We can't meaningfully discuss the challenges that face small telephone companies
without spending some time on the average schedules. A little less than half of you currently
settle with the NECA pools based on the average schedules. I have no plans to propose
doing away with the average schedules. But I am interested in making them reflect actual
costs as much as possible. We are continuously working with NECA to make the schedules
more accurately reflect actual company costs.
Access Reform
We also need to work with you to determine how access reform should impact small
companies. The first step in this reform process is to enable you to charge interstate access
rates that are more consistent with principles of cost-causation and economic efficiency.
Smaller rate-of-return telephone companies have expressed concern that existing high per-
minute rates for interstate access places them at a significant disadvantage in attempting to
compete with new access service providers. In particular, I have heard concerns that the rate
structures and levels mandated by our current access charge rules make your most lucrative
customers, those that make many long distance calls, especially vulnerable to competing
offers from new entrants.
You need to be allowed to move your rates to more economically efficient levels.
Otherwise, you face the potential loss of customers to less efficient new entrants whose rates
are lower than those currently assessed , but higher than the rates you would charge if our
access charge rules were reformed. In addition, reductions in interstate access charge per-
minute rates translates into lower per-minute long distance charges for consumers, which
benefits both customers and carriers. Customers get more value for their money, and can
afford to make more long distance calls, while carriers obtain additional revenues as a result
of the increased calling volumes.
I also recognize that access reform for the smaller, rate-of-return companies may raise
new or different issues that we did not have to address in our proceeding involving the
typically larger, price cap companies. Differences between rate-of-return and price cap
carriers may require different approaches to reform, including a different transition to more
economically efficient, cost-based interstate access charges. In light of the differences
between rate-of-return and price cap companies, the Commission decided to initiate an access
reform proceeding that would deal solely with the rate-of-return LECs. I support that
decision.
Pricing Flexibility
There is the related issue of pricing flexibility for small companies. We must
recognize that the economics of small rural companies is different from that of US West.
You provide service where no one else wants to compete. The only competition you may
see is someone trying to cream skim your largest customers. You must be able to respond to
such threats. Many of you have expressed an interest in greater pricing flexibility. I agree.
We need to develop a record on pricing flexibility for small companies and I would like to
get the process started this year.
Deregulation?
We need to strive to find a better paradigm for small company regulation. I think we
can agree that it does not make sense to force small companies into a BOC-style price cap
regime. But we need to look for creative alternatives to cost of service regulation. I would
like to initiate an informal dialogue with you to discuss the future regulation of small
companies. And I think that dialogue should include a discussion of the pros and cons of
interstate regulation of small telephone companies. Many states do not regulate your rates,
and others do not regulate you at all. Notwithstanding this lack of state oversight, local rates
appear relatively low and stable and we don't see widespread deterioration of service. We
could benefit from a frank discussion of whether we should import some of these ideas to
the interstate jurisdiction.
III. A Framework for Dialogue
Well, clearly we have much work to do together. Universal service. Access reform.
Pricing flexibility. Deregulation. As a starting point, and as I begin my tenure as Chairman
of the FCC, I want to make sure that we have ways to maintain a dialogue on these issues.
This is important to me and I know it is important to my other colleagues on the
Commission. So we will be announcing in the next few weeks the membership of a Rural
Task Force. The Rural Task Force will be selected by the Joint Board on Universal Service.
Its members will be charged with fostering continuous dialogue and action on the issues that
I am discussing today, and other issues of importance to rural subscribers.
We have also designated a senior-level member of the Common Carrier staff to serve
as the FCC's ombudsman on rural issues. We have asked Sonja Rifken to serve in this role.
Sonja and I worked together in the Office of General Counsel. She now serves as Special
Assistant to Richard Metzger, Chief of the Common Carrier Bureau. She is a dynamo and I
know she will do a wonderful job in making sure that your issues receive the focus that they
deserve by the Commission staff and the Commissioners.
Another opportunity for dialog on these issues will be the proceeding on Section 706
of the Telecommunications Act. Under Section 706, this year the Commission will initiate
proceeding to determine whether advanced telecommunications capability is being deployed
to all Americans in a timely fashion. We want to identify and remove barriers to
infrastructure investment so we can promote investment in more bandwidth capacity. This is
so crucial to the development of infrastructure everywhere, and especially in rural areas.
I hope to hold a series of field hearings, perhaps in conjunction with your state and
regional conventions. The purpose is to get a better handle on the state of deployment of
advanced technology in rural communities. I hope that I can count on you to make this
effort a success.
IV. Conclusion
In conclusion, let me just say that I hope you share my vision of a competitive
telecommunications marketplace that leaves no one behind and keeps all of America
connected. Competition building communities. Let's work together to make sure that this
happens for our country.
Thank you for having me here today.